Estate of Morse

• Decision Date: 06 July 1970
• Citation: 9 Cal.App.3d 411,88 Cal.Rptr. 52
• Court: California Court of Appeals Court of Appeals
• Parties: In re ESTATE of Barney MORSE, Deceased. Houston I. FLOURNOY, State Controller of the State of California, Appellant and Respondent, v. Augusta MORSE, Executrix, Respondent and Appellant. Civ. 35905.

Page 52

88 Cal.Rptr. 52

9 Cal.App.3d 411

In re ESTATE of Barney MORSE, Deceased.

Houston I. FLOURNOY, State Controller of the State of California, Appellant and Respondent, v. Augusta MORSE, Executrix, Respondent and Appellant.

Civ. 35905.

Court of Appeal, Second District, Division 3, California.

July 6, 1970.

Myron Siedorf, Acting Chief Inheritance Tax Atty., Walter H. Miller, Chief Asst. Inheritance Tax Atty., and Edwin Rosenthal, Asst. Inheritance Tax Atty., for appellant and respondent.

Arthur V. Kaufman, Los Angeles, for respondent and appellant.

COBEY, Acting Presiding Justice.

These are cross-appeals by the State Controller and by a taxpayer, Augusta Morse, from a judgment redetermining the amount of tax due under the Inheritance Tax Law from the various beneficiaries of the will of Barney Morse, who died on March 31, 1968.

These appeals involve questions of interpretations of Revenue and Taxation Code, sections 13692 and 13694 ¹ as applied to an implied gift of a power of appointment to a surviving spouse over much of the deceased spouse's one-half of their community property. To our knowledge this case is the first to interpret these sections since they were rewritten in 1965.

The difference in the total inheritance tax due under the will between that proposed by the inheritance tax appraiser and that redetermined by the trial court is $57,446.75. This difference arises largely from the circumstances that the appraiser assessed that portion of the tax attributable to the transfer of the residue of Barney's estate entirely to Augusta, while the court assessed this portion entirely to the remaindermen.

The sole question presented by these appeals is the taxability of the interest Augusta received under Barney's will in his one-half of their community property. The controller's position is that Augusta, by reason of her unlimited right to consume the property bequeathed to her, received under the will Solely a general power of appointment over such property and therefore the transfer should be taxed to her alone without any deduction other than the specific exemption. Augusta's position is that under the will she either received this property in fee or a life estate in it with a power to consume it and that in either event no inheritance tax is due from her on this transfer.

The trial court found that Augusta, as the surviving spouse, received a life estate in such property with the right to consume it during her lifetime. To resolve this controversy we must first determine exactly what Augusta received under the will.

NATURE OF AUGUSTA'S INTEREST UNDER THE WILL

Barney's last will was a joint and mutual will of Barney and Augusta. (See Daniels v. Bridges, 123 Cal.App.2d 585, 588--589, 267 P.2d 343.) This will directed, after making two comparatively small specific bequests, that the entire residue of the estate of the first to die should go to the survivor. Upon the death of the survivor one-half of the estate Remaining, if any, should go to their only issue, a son, if living, and the other one-half should be divided into four separate trusts for the benefit of his four children. The final paragraph of the will read as follows:

'EIGHTH: This Will is irrevocable and not subject to modification except with the the written consent of both of us during the lifetime of both of us. After the death of either of us this Will shall continue in full force and effect and as long as our son or any issue of our son shall be living shall not be subject to modification, alteration or revocation by the survivor.'

In December 1968, at the conclusion of the appropriate statutory proceedings (see Prob. Code, § 1080 et seq.), the probate court determined by decree that Barney's entire estate consisted of the community property of himself and Augusta and that aside from the two minor specific bequests, which we have already mentioned, all of his estate was bequeathed to Augusta. But this decree, which as a final decree would otherwise be binding upon us in these proceedings (see Prob. Code, § 1082; Estate of Radovich, 48 Cal.2d 116, 121--124, 308 P.2d 14; Estate of Clarke, 66 Cal.2d 142, 145--146, 56 Cal.Rptr. 897, 424 P.2d 337), is silent upon the issue before us, namely, the nature of the interest which Augusta received under the will.

We think that both parties are wrong regarding the nature of this interest. The controller is correct, however, in his contention that, since Augusta was bequeathed the right to consume during her lifetime all or any portion of the residue of Barney's estate, she obtained under the will, for inheritance tax purposes, a general power of appointment over this community property.

The Inheritance Tax Law makes taxable, at the date of the donor's death, the gift of certain powers of appointment. (See § 13694.) The gift to a donee of property of an unlimited power to consume it during her lifetime is inferentially a gift of a general power of appointment over this property. (See § 13692(a).) ²

This conclusion is supported by the legislative history of the changes made in the taxation of powers of appointment under the Inheritance Tax Law by the Legislature in 1965. At that time the State Bar of California sponsored a bill making, among other things, various changes in the Law. (40 St. B.J. 135.) During the bill's passage through the Legislature it was amended to include a complete revision of the article in the Law dealing with powers of appointment. (See A.B. 2450 (1965) Reg. Sess., April 14, 1965, as amended by State Senate June 9, 1965.) According to the sponsor of the bill the purpose of this revision was to conform the Law to 'the federal estate tax treatment of such powers' and to add in essence to the Law, among other things, section 2041 of the Federal Internal Revenue Code. (40 St.B.J. 600, 607.) A comparison of the language of section 13692, as then rewritten, with that of section 2041(b) (1) of title 26 of the United States Code readily establishes that the language of our statute is substantially identical with that of the federal statute.

Under these circumstances we believe that we should follow the applicable federal administrative regulation, ³ and federal decisional law in interpreting section 13692, our counterpart to their section 2041(b)(1). (See Holmes v. McColgan, 17 Cal.2d 426, 430, 110 P.2d 428; Douglas v. California, 48 Cal.App.2d 835, 838, 120 P.2d 927; Meanley v. McColgan, 49 Cal.App.2d 313, 317, 121 P.2d 772.) The federal courts have held in circumstances very much like those of this case that the bequest to a surviving spouse under a joint and mutual will of an unlimited power to consume the life estate also bequeathed to her amounts to the gift to her of a general power of appointment and the property subject to the power is includible within the estate for federal estate tax purposes. (See Phinney v. Kay (5th Cir. 1960) 275 F.2d 776, 777, 780--781; Potter v. United States, D.C., 269 F.Supp. 545, 550.)

From the cases cited in the controller's brief and from our own research, it appears that there is no significant dissent in the federal cases from this conclusion. Accordingly we hold that Augusta received under the will a general power of appointment over the residue of Barney's estate.

The controller is, however, incorrect in his further claim that this power of appointment was all that Augusta received under the will. We believe that she also received an estate which was more than an ordinary life estate but less than a fee interest. She received more than a life estate in two respects. First, under the last paragraph of the will, which we have quoted in full earlier, if her son and his issue do predecease her, she is privileged to convert her interest into a fee interest. Secondly, and of significance in the tax controversy before us, her unlimited right to consume all of this property is not an attribute a life tenant usually possesses. (See 2 Witkin, Summary of Cal. Law (7th ed. 1960) § 100, p. 954.)

The controller is further in error in asserting that Augusta did not receive under the will a life estate. What she received was an unusual and particularly favored form of life estate. In one paragraph of the will she was bequeathed the residue of Barney's estate. In the immediately succeeding paragraph the will directed, as we have previously indicated, that upon her death property Remaining, if any, from this bequest should go to her son and his four children. This disposition of this property upon her death is binding upon her because of her written agreement not to change the will contained in the last paragraph thereof which we have quoted earlier. (See Brown v. Superior Court, 34 Cal.2d 559, 563--564, 565, 212 P.2d 878.)

She therefore received under the will a life estate. The failure of the will to include the usual words expressly limiting her estate to one for life does not invalidate this conclusion. (See Estate of Rath, 10 Cal.2d 399, 404, 75 P.2d 509; Hardy v. Mayhew, 158 Cal. 95, 103, 110 P. 113; Burnett v. Piercy, 149 Cal. 178, 192, 86 P. 603; Estate of Smith, 196 Cal.App.2d 544, 549, 16 Cal.Rptr. 681, hear. den.; Steeve v. Yaeger, 145 Cal.App.2d 455, 462, 302 P.2d 704, hear. den.; Hill v. Thomas, 135 Cal.App.2d 672, 677, 288 P.2d 157.) The grant to her of the unlimited right to consume the...